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Immediate Annuity

What Is a Single Premium Immediate Annuity? (SPIA)

A single premium immediate annuity, or SPIA, is an annuity purchased with a single premium payment, and for which income payments to the payee will commence at once. This is in contrast to a deferred annuity, under which payments are typically expected to begin sometime in the more distant future. 

The applicant for the SPIA elects the payment frequency at the time of application for the annuity. Payments may be made as often as monthly or as infrequently as yearly. The income may commence immediately or as late as one year from the annuity issue date.

What Are the Typical Sources of the Single Premium?

SPIAs are often purchased by someone who has a substantial sum of money from a source such as an inheritance, a life insurance death benefit, a maturing certificate of deposit, or a lump-sum qualified retirement plan distribution.

How Do SPIAs Work?

The single premium is deposited into either (1) a general account paying interest at a guaranteed rate, or (2) one or more separate accounts paying interest at a rate that varies with the performance of the underlying securities or, in the case of an indexed annuity, that varies according to the insurer's crediting procedure. 

The premium plus the interest earned provide the stream of income for the payee—a stream intended typically to provide income for a lifetime, for a specified period, or for some combination of both. The amount of each payout depends on the amount of the single premium paid, the period during which payments will be made, the number of payees, and whether or not a refund or death benefit is desired.

How Will Income Be Paid?

A variety of payout options are generally available. A straight-life or life-only annuity stops making payments when the annuitant dies, but has the advantage of providing the maximum periodic payout amount. A joint-and-last-survivor annuity makes payments until the death of the last annuitant. Sometimes, a reduced payment—often two-thirds or one-half—is made after the first annuitant dies. A period-certain annuity makes payments for a specified period of time until the period elected is completed. An amount certain annuity pays a specified amount on a regular basis. The length of time it will be paid depends on how much is available in the annuity at the start, the interest rate, and the amount of each payment. With a refund annuity, if the annuitant dies before the full premium is recovered through annuity payments; the insurer will provide either continued income or a lump-sum settlement to a named beneficiary. 

How Are Income Payments Taxed?

If the single premium is from qualified funds on which no taxes have been paid, each payment will be taxed in full.

If the premium is paid from nonqualified funds, the IRC Section 72 annuity rules allow the tax-free recovery of basis spread over life expectancy. This means only the earnings, not the principal, will be taxed. An exclusion ratio is used to determine the amount of each payment that will not be taxed.

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